Under the Real Estate Settlement Procedures Act of 1974 (“RESPA”) and its implementing Regulation X (collectively, “RESPA Section 8,”) a person is prohibited from giving or accepting “any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” (12 U.S.C. § 2607(a)).
RESPA does not prohibit referrals in real estate settlement services, but when a referral is made in connection with any form of compensation or thing of value, the exchange implicates RESPA Section 8. In addition, RESPA Section 8 permits “normal promotional activities that are not conditioned on the referral of business and do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business.” (12 C.F.R. § 1024.14(g)(vi)).
Real estate agents, mortgage loan officers, escrow agents, etc., tend to work together regularly and often refer clients to one another; thus, it may become difficult for companies to defend the position that such clients were not referred in exchange for a “thing of value” in cases where one party has defrayed expenses for another. A common example occurs when a mortgage loan officer and real estate agent market their services together, but the loan officer pays more than the loan officer's fair share of costs or otherwise covers costs that would normally be incurred by the agent. Regardless of the intent of the loan officer, a RESPA regulator could view this as a disguised attempt to pay for referrals and a potential RESPA Section 8 violation could result.
These issues are compounded by the fact that the Consumer Financial Protection Bureau (“CFPB”), which has authority over RESPA, has taken an aggressive position on marketing under RESPA in the context of marketing services agreements (“MSAs”) and appears to be scrutinizing all types of business arrangements that may appear to involve referrals or otherwise implicate RESPA Section 8. As a result, mortgage companies, real estate companies, title companies (and others that are incident to or part of real estate settlement services regarding federally related mortgage loans) have become increasingly focused on ensuring that their co-marketing activities do not expose them to potential RESPA Section 8 violations.
Although all parties involved are subject to the regulations and the risks involved with engaging in activities that fall under the scrutiny of the CFPB, mortgage companies tend to be the most scrutinized in this regard and, therefore, tend to be very focused on ensuring compliance. Risk and Compliance policies and acceptable practices vary from mortgage company-to-mortgage company, with regard to how much documentation and proof of compliance is required from employees involved in co-marketing activities, but all may benefit from a sound methodology and a repeatable process for ensuring compliance with RESPA Section 8 and mitigating the risk of such violations. The need for such policies and practices becomes even more apparent in the event a mortgage company faces an audit or investigation by the CFPB.
Prior attempts by co-marketers, such as real estate agents and mortgage lenders, to divide expenses appropriately have been done with rough estimates and “eyeballing” the allocated space on joint co-marketed documents. This lacks the precision needed for compliance and is potentially illegal.